Excise Tax Theory: Myth v Reality

Summary

Proponents of the excise tax on higher-cost health plans make multiple unrealistic and harmful assumptions. In reality, and contrary to the theories used to support the tax, the tax would lead to both bad health care policy and a serious deterioration in workers’ financial standing. In addition, not only does the tax stand little chance of addressing the problem of rising health care costs, it could increase plan costs by forcing workers to cut back on necessary and cost-effective medical services.

Myth v. Reality

There are many inaccurate statements about the excise tax. The following are the top three myths as well as the realities that correct those myths.

Myth #1:

High-cost health plans are the result of rich benefits. Therefore, taxing plans with higher premiums will lead to greater efficiency in the marketplace but not harmful health outcomes.

Reality: It is wrong to assume that high premium costs are the result of rich benefits.

“The premise that high costs occur only in Cadillac plans is wrong. The new tax would also apply to plans whose members have greater health care risks and needs, and also those who live in high cost geographic areas.” Watson Wyatt, p. 2.

In examining the presumption that high-cost plans are expensive because of rich benefits, a study in Health Affairs found that "other factors—notably industry sector and the costs of delivering care in the region—are more likely to explain the higher costs of some health plans." Health Affairs, pp 1-2.

“Only 3.7 percent of variation in the cost of family coverage can be explained by benefit design.” Health Affairs, p. 1.

“The idea of taxing so-called Cadillac plans may not sound unreasonable upon first glance. But an actuarial view quickly reveals that the high cost of these plans has as much to do with the characteristics of the covered population as it does with benefit richness.” Milliman, “No Room to Stand,” p. 1.

Reality: Age and gender are major determinant of premium costs, so the excise tax will penalize people based on factors over which they have no control—like the fact that they are older or happen to be women. (Note: More than seventy percent of NEA’s members are women.) Click here to read the NEA’s paper: THE EXCISE TAX ON HIGH-COST HEALTH PLANS: UNFAIR TO WOMEN

“Clearly the age and gender composition of a covered group is a major determinant of plan expense, as women in their child-bearing years spend far more than men in the same cohort, and costs escalate after age 40 for both men and women.” Watson Wyatt, p. 3.

Based on a claims database of over 5 million people with coverage from large employers, Watson Wyatt examined how much more it costs to insure women than men. It looked at five-year age groupings for employees between the ages of 20 and 64, determining that in every age group, women cost more to insure. In fact, in the 25-29 and 30-34 age groups, women were more than twice as costly as men to insure. Watson Wyatt, p. 4.

Reality: Costs vary greatly between locations, so the excise tax will penalize people based on where they happen to live.

In its annual study of regional health care cost variations, which focuses on 14 cities across the country, Milliman found: “The costs vary from low to high by more than 30%.” Milliman, Medical Cost Index, p. 4.

“The research provided by Fisher and colleagues indicates that area cost variation is far greater at the local level than at the state level.” Watson Wyatt, p.6.

Reality: It is wrong to assume that the excise tax will hit plans considered over-generous.

“Regardless of the geographic area, it appears that the excise tax will eventually hit all plans with average cost sharing provisions.” Watson Wyatt, p. 8.

Reality: The excise tax will lead to harmful health outcomes and possibly higher health care costs.

“Consumers may respond to their increase in out-of-pocket burden by cutting back on medically indicated as well as cost-effective medical care.” Economic Policy Institute, p. 1.

“Research has demonstrated that low-income and chronically ill populations are generally harmed by higher cost-sharing and may actually incur higher overall costs in response to the introduction of this cost-sharing, as they cut back too much on cost-effective managing of chronic conditions.” Economic Policy Institute, p. 5.

Myth # 2:

The excise tax is good for workers because their salaries will increase substantially when the tax leads to health benefit cuts.

Reality: The excise tax will be devastating to workers.

“The impact [of the excise tax] would fall disproportionately on Americans who already face higher out of pocket costs. These include people who live in high-cost areas, women (whose costs are higher than men) and people suffering from chronic diseases.” Watson Wyatt, p.2.

Benefits consulting firm Mercer conducted a survey of employers, finding: “One argument that some have made in favor of the excise tax is that employers cutting benefits would return the savings to employees in the form of higher wages. However, less than a fifth of respondents (16 percent) say they would convert their cost savings into higher pay.” Mercer, p. 1.

The Mercer survey also found (page 2):

“Nearly two-thirds (63 percent) of employers in a recent survey by Mercer say they would cut covered benefits to avoid paying the excise tax.”

“Notably, 9 percent of small employers—which typically offer only one medical plan choice—say they would terminate their plans, potentially forcing their employees into the individual market.”

State and local governments are under tremendous fiscal pressure, so it is naïve and disingenuous to suggest that cost savings derived from health benefit cuts will be allocated toward salary increases for public employees instead of plugging budget holes (given the constitutional need at the state level to balance budgets). In addition, well into the future competing fiscal priorities will make public employers no more likely to increase salaries than they have been in recent years. “Even if the recession is over, state budgets are still in appalling condition and are going to be that way for quite a while," said Corina Eckl, fiscal director at the National Conference of State Legislatures. “For many states, revenue recovery is not even in the forecast." http://www.ncsl.org/?tabid=19251

Myth #3:

The excise tax will help solve the problem of high health care costs.

Reality: The excise tax is a misguided tool for addressing health care costs, given what actually drives premium costs, and the fact that the sickest people incur most of the health care costs in this country. (In fact, as NEA has argued elsewhere, the way the tax is structured could lead to consolidation and anti-competitive practices in the insurance industry.)

"The existing academic literature as well as indirect evidence provided by overall income tax changes in recent decades indicates that any cost containment from the excise tax will be completely swamped by other determinants of health care costs.” Economic Policy Institute, p. 7.

“Even if all goes as its proponents claim, the proposed excise tax simply does not threaten to make a large dent in the upward march of American health care costs. For one thing, the sickest 20% of the population account for 80% of total health spending in a given year.” Economic Policy Institute, p. 7.

The above quotes are from the following six recent reports that show why the theory and assumptions behind the excise tax do not stand up to scrutiny.

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